18 February 2010

WMT: Income Statement Analysis for the January 2010 Quarter

Wal-Mart Stores (NYSE: WMT) earned $1.21 per share in the fourth quarter of fiscal 2010, which ended on 31 January.  This per-share amount is 26 percent more than earnings of $0.96 in the previous January quarter.

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Walmart surpassed our EPS target of $1.10 by $0.11 per share.  However, if a $0.10 nonrecurring tax benefit and a $0.04 restructuring charge are excluded, the difference between reported earnings and our target value shrinks to $0.05.

The principal sources for the income statement analysis were the earnings announcement and the ensuing conference call (transcript available from Seeking Alpha).

In a second article, we will report Walmart's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Discounter Wal-Mart Stores, Inc., had sales over $400 billion, nearly 10 percent of U.S. retail sales, last year.  This earned Walmart the Number 2 position on the Fortune 500 list of America's largest corporations, behind Exxon Mobil (NYSE: XOM).  Additional background information about Walmart and the business environment in which it is currently operating can be found in the look-ahead.

Pleasclick here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue (Net sales and some other income) of $113.7 billion was 4.5 percent more than in the same quarter of 2008.  Changes in currency conversion rates added about $1.9 billion to Net Sales.

The reported figure for Revenue was less than our $114.6 billion estimate by 0.8 percent.

Sales at the company's eponymous U.S. stores decreased 0.5 percent, relative to the previous year's fourth quarter.  A slip in same-store sales of 2.0 percent might be more worrisome.  Sam's Club did better: sales increased 3.8 percent.

International stores also did well, recording a 19.5 percent sales increase or 11.9 percent on a constant currency basis.  The International figures benefited (not sure how much) from Walmart's acquisition in Chile.

The Cost of Goods Sold (CGS) was 75.1 percent of Revenue, which translates into a Gross Margin of 24.9 percent.  The margin was 24.6 percent (restated) in the January 2009 quarter.  Walmart beat our margin estimate of 24.3 percent by 60 basis points.

Sales, General, and Administrative (SG&A) expenses increased 3.2 percent, from $20.4 billion to $21.1 billion, which was more than we expected.  Nevertheless, as a percentage of Revenue, SG&A decreased from 18.8 percent to 18.5 percent.  

We had estimated these expenses would be 18 percent of Revenue.

The various operating items combined to produce Operating Income of $7.26 billion, a 13.8 percent gain over the $6.38 billion in the year-earlier quarter.  The improvement was mostly due to the increase in Revenue, but the small margin improvement and cost control also helped. 

Operating Income eked out a 0.5 percent gain over our $7.22 billion estimate.

The Net Interest expense fell 4.7 percent to $469 million.  We had expected $500 million.

The effective Income Tax Rate in the quarter was 28.4 percent, which is significantly less than Walmart's typical rate of around 34 percent.  The explanation is that the company garnered:

$372 million, or $0.10 per share, in net tax benefits primarily from the repatriation of certain non-U.S. earnings that increased U.S. foreign tax credits.
Income attributable to noncontrolling interests and a loss from discontinued operations were each about $50 million more than we expected.  Taking these into account, Net Income attributable to Walmart shareholders of $4.6 billion ($1.21 per share) was 22 percent (26 percent) more than in the January 2009 quarter.  Net Income exceeded our $4.3 billion forecast by $344 million.

In summary, Walmart's Revenue, Operating Income, and Net Income all increased in the fourth quarter.  The results benefited to some extent by currency exchange rate variations and to a significant extent by a one-time tax benefit.   The decline in U.S. same store sales is what concerns us the most for the future.

Full disclosure: Long WMT at time of writing.

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